Online Sales Taxes Could Cripple eCommerce AND Affiliate Industries

Several states are considering an expansion state sales taxes to out of state businesses. New York and Rhode Island (so far) have successfully passed what’s being referred to as the “Amazon Tax;” capitalizing on the confusing question of nexus and across state border online merchants.

Nexus is based on a Latin term meaning to bind. When you talk about nexus and sales tax, it means that a state can require a business to collect tax on products sold in or shipped to that state when the business has nexus (a link or connection) in the state.

The obvious and appropriate alternative is that a state can not require sales tax collections from a business that has no connection (nexus) in that state.

When you order a smart phone from an out of state vendor, most often online, you usually avoid paying sales tax. If you purchased that same phone at a local store, you would be charged anywhere from 3%-7.25% in state sales tax.

What the so called Amazon Tax attempts is to expand the definition of nexus to include out of state merchants simply advertising products within the state; for the 2009/2010 fiscal year, the State of New York expects to raise an additional $1 billion in revenue from changes to New York sales tax laws. Already starting to sound unfair? Read on…

Most often, this advertising is done through 3rd parties known as affiliate marketers. Amazon.com and Overstock.com are two of the most significant merchants in the affiliate market place. Both have taken a stand against the new tax by canceling all affiliate marketing programs states in which such laws are passed. Effectively saying to States, if you attempt to collect sales tax simply because a third party website in your state advertises Amazon products, we’re pulling out. Not only does the state miss out on the sales tax, but they also loose any income tax on affiliate commissions earned by the website in the state. Oops.

No matter how you slice it; this seems like a bad idea for everyone involved. Most importantly, it creates complexity for merchants who now have to not only track sales tax in different states and countries, but where their affiliate advertisers might reside. If you are interested in updates on the Amazon Tax in your state, the Performance Marketing Alliance tracks the latest affiliate tax news on their blog.